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The Greek Catastrophe Is Finally Here (Unless It Isn’t)

June 29, 2015

Greece is entering a world of pain; the rest of us, a tense waiting game. But the odds favor containment of the crisis.

It was a grim weekend in Greece, and it’s likely to be an even grimmer week ahead, both for the Greeks and the European (and possibly world) economy. What would normally be the beginning of the profitable tourist season—a summer idyll in the lovely Greek islands and crowds piling into the Parthenon—has turned into the next chapter of the slow-motion economic train wreck that the world has been witnessing queasily since 2011. Now the wreck is finally here, and the only real question—the one none of us can really answer—is whether it will be modest or huge.

On Sunday, the Greek government led by Prime Minister Alexis Tspiras announced that it was closing all banks for a week and the stock market as well to stave off the likelihood of devastating bank runs. The move came after Greece’s European creditors— a motley assortment of northern European governments along with the European Central Bank and the IMF— decided to call Tspiras on his game of chicken. The prime minister on Friday angrily walked out of last-minute negotiations and denounced the creditors' call for more austerity measures in exchange for further payouts. Then, on Saturday, Tsipras proposed a referendum in Greece to decide whether to support the draconian conditions, making it clear that he favored a no vote. ““I call on you,” he announced in a televised address, “to decide whether we should accept the extortionate ultimatum that calls for strict and humiliating austerity without end, and without the prospect of ever standing on our own two feet, socially and financially.”

There is only one little problem with the referendum (in addition to a plethora of bigger ones): It is scheduled for July 5th, which is five days after Greece is due to make a 1.6 billion euro payment to the International Monetary Fund, which means that even a yes vote to accept the further budget and pension cuts along with tax increases may come too late to halt a chain reaction that will force Greece to abandon the euro as its currency, default on its national debt and endure the wrenching restructuring of bankruptcy.

And then what? The fact is, none of us know. Whether you think the exit of Greece from the eurozone will lead to the feared contagion that will infect the entire euro-bloc and possibly the global financial system depends largely on your personal make-up. Pessimists have ample fodder for their concerns, pointing to the tenuous commitment of other opponents of further austerity in Spain and Italy and the opacity of the global financial system where derivatives still abound and psychology remains fragile even six years after the worst of the financial crisis of 2008-2009.

Those of a more optimistic bent, like me, can argue again, as we’ve all been doing for the better part of the past five years, that Greece’s GDP is the size of Delaware and that its total debt of about $400 billion is not, in the greater scheme of things, an egregious amount that should threaten a European Union with an output of $18 trillion (or even the smaller eurozone at about $13 trillion). There is also the mantra of European finance ministers that over the past few years Greece has been quarantined financially, its debt held by governments and the International Monetary Fund, and a now-active European Central Bank determined to take extraordinary measures in case of the financial unraveling of Greece that now seems increasingly likely.

The commentariat excels in the art of certainty; politicians and economists are equally susceptible to the temptation. Hence the frequent–and frequently wrong–slew of prognostications over the past five years on whither Greece and how will it matter.

True, the last paroxysm of near-global financial implosion came in November of 2011 and that was indeed triggered by cascading fears of a Grexit. Fears about what a Greece departure from the eurozone will mean for the euro are hence understandable given past precedent. That does not mean that such fears are a marker of what lies ahead.

It is, of course, getting tiring to be agonizing over this, which may be one reason why both the current Greek government and its assorted creditors are essentially saying basta (or rather arketa, which would be the Greek equivalent). After all this time, anything conclusive, even a collapse, can feel preferable to this death by a thousand cuts (and it is nigh impossible to speak of Greece this days without resort to any number of clichéd and hackneyed expressions, such as “day of reckoning,” “Greek tragedy,” “nightmare,” and so on).

There is something bloodless in this endless impasse, skating as it does over the daily plight of 11 million Greeks who have seen pensions decimated, incomes halved or more, and no end in site. The deep corruption of Greek civil society, understood by Greeks themselves, will eventually need to be dealt with by Greek themselves, which no amount of invective at heartless creditors (and creditors are rarely known for heartfulness) will ameliorate. But social progress rarely comes in the midst of economic collapse, and the past years have not been a propitious time to address decades of dysfunction.

So what happens next? During the bleakest moments of the global financial crisis, we all faced the question of whether the ATMs would stop working and the entire financial system would simply halt. That didn’t happen, thanks to a combination of fate and a lot of government intervention. With Greece today, assuming the ECB holds firm in its refusal to extend credit and the government in Athens leaves the euro zone, it comes down to this: Either Grexit will be only the first shoe to drop (groan) in the unwinding of the euro zone—and thus a major blow to the world economy just as policy-makers (the hopeful Obama administration among them) are banking on stable growth—or it will not. There is not much middle ground. It isn’t going to be a small crisis, other than for the Greeks themselves who have already been facing a major one. It is either going to trigger a major international episode, a Lehman Brothers redux, or it will not.

My opinion, and that is all any of us possess about this particular future at the current moment, is that it will not. Financial markets may have a very rough few weeks. Greece may stay with the euro, and it may not. In neither case is this likely to be the beginning of the great unraveling. The world is too big, and the international buffers are just strong enough. It wasn’t worth the risk to reach this point, for which Greece’s creditors deserve more blame. The bluff of the Greek government that such a risk was unacceptable has been called, to the impoverishment of many. But there is, as many have said, only one end of the world, and this isn’t it. Then again, I’m an optimist.

All we can do is wait for the catastrophe, whether big or little, to unfold.

Author’s disclaimer: The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities, or investment advice or a recommended course of action in any given situation. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Information obtained from third party resources are believed to be reliable but not guaranteed. This paper may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.